Market still trending up; domestic consumption sectors good: SBI Mutual Fund

SBI Mutual Fund’s Jayesh Shroff in a chat with ET Now this morning explained that he still doesn’t feel that the markets have reached a bubble stage. His fund is very aggressive on the domestic consumption space and within infrastructure on the power space.

Do you believe that markets are fairly valued and that it was time to start booking just that little bit of profit?
The market is still trending up and in any trending market, market would usually trade above the fair valuation zone. So, the market never trades at equilibrium. On the upside it will always trade above the fair value and on the downside it will trade below the fair value. I think it is normal maybe and another thing that I feel is that the analyst community is behind the curve in terms of upgrades and we will see maybe few upgrades coming in post the results that will be declared this month and to that extent may provide a further fillip to the market.

Is there hint of a liquidity led bubble in the Indian markets, do you think that is a possibility at all?
It could be a possibility but it is just not a possibility in a very-very near future. So I think we still can’t say that we have reached a bubble stage and where you need to worry too much about excessive flow of money into the equity markets either from the domestic or overseas investors.

What could be the spaces that investors could look out for say maybe the next three to six-month time frame?
We as a fund house are extremely bullish on the domestic consumption space and maybe that would include food and food products, entertainment and so on. That is one space or one theme that we are playing very aggressively and I am also playing it in the funds that I manage very aggressively.
The entire cement exposure of the BK Birla Group eventually at some point in the future might actually be consolidated into one company. Do you think that is a potential possibility in the future and would you be positioning your own portfolios to see some value unlocking, value building when that eventually happens?
The promoter group has that decision to take and we do not have any clues to that. I think stock specific we would generally not discuss, but, in this case it is a diversified company which offers value in lot of the businesses it has apart from the real estate that it has, so I think for us and sum of parts make more sense. We have never looked at whether the cement business is going to get merged with some other company or not.

In the last one month have you been sellers in Indian equities?
No, we have not been sellers in Indian equities and at the best we would have actually deployed money because of the inflows that we would have received and I think the market is as I said earlier is trending up and would likely to, I mean is likely to remain buoyant for maybe at least in the extreme short term.

Your portfolio seems to have a positive bias towards the capital goods space based on the top ten holdings. What are the views on that space and the current valuations?
With the kind of demographic change that the country is going through and will continue to go through over next 15-20 years, the future of Indian economy and to that of extent Indian equities is extremely bright. Within that, as I said, the best play on of course this demographic change is the domestic consumption sector and that is what we are playing aggressively at this point in time. However, India is an extremely deficient country as far as infrastructure and the basic infrastructure is concerned and to that extent there is immense opportunity for players in that space to actually grow and expand.
Growth of 8% plus you are talking for a foreseeable future is not possible without development of world class infrastructure and the government definitely does not have resources and the capabilities to develop all kinds of infrastructure. So in India you have seen over the past two or three years that PPP that is the public private partnership has become a norm and has been very-very successfully implemented in lot of sectors which is a huge opportunity for infra place. Capital goods of course is one of the largest segment within the overall infra theme and primarily what we are playing here is the power sector.

Source: http://economictimes.indiatimes.com/articleshow/5090165.cms?flstry=1

'Our guiding principles will ultimately differentiate Axis from the rest'

AXIS Asset Management Company, the wholly-owned subsidiary of Axis Bank, recently got the regulator's approval to launch its funds. Axis AMC plans to draw on its strong client base of the bank to build the asset management business, says Axis AMC MD & CEO Rajiv Anand in an interview. Excerpts:

How soon do you plan to launch your funds, and how will Axis AMC distinguish itself and grow in this already crowded market?
We have received regulatory approvals for two schemes — Axis Liquid Fund and Axis Treasury Advantage Fund. And these schemes will be launched in the first week of October. Axis Bank has a presence in over 525 Indian towns through 861 branches and has over 75 lakh customers. Our gameplan is to leverage these strengths.
We want to build our business on three strong pillars, i.e., investor-oriented communication, forging long-term relationship and enduring wealth creation as opposed to just short-term opportunistic wealth creation. These guiding principles will ultimately differentiate Axis from the rest.

Is there any scope for further product innovation?
As the Indian investor evolves and our markets develop further, there will be product innovation opportunities. We are, for example, very interested in creating retail debt products, which can deliver superior tax-adjusted returns with low volatility.
Having said that, with current levels of penetration of mutual fund products in India, what we need is more innovation in communicating the benefits of the product and telling retail investors how mutual funds fulfil an investor's needs.

Do you have any plans for inorganic growth? Do you intend to bring in a foreign partner?
We are open to inorganic growth. However, the fit — especially from an investment philosophy perspective, should be right. Needless to say the price has to make sense. Currently, we have no plans to bring in a foreign partner.

What is your view on equity market? Are you comfortable with valuations after the recent run-up?
It is difficult to assess markets in the short term, more so in an environment where asset classes across the world are moving synchronously on low-opportunity cost of funds. We believe that the current low interest rate environment and relatively high growth in the Indian economy justifies current valuations. Going forward, markets should deliver returns in line with the profit growth of Indian companies.
This we believe should be in the vicinity of 15% over the next three years. We believe that corporate profits drive stock prices over the medium and long term and hence, we anticipate similar growth from equities over this period. While stock markets are no longer cheap after the sharp run-up seen in the markets, investors would do well to maintain their targeted equity allocations and benefit from this long-term appreciation opportunity.

What is your view on the interest rate scenario in India?
From a policy perspective, RBI will continue to balance growth and inflationary expectations. RBI will also have to consider expansionary fiscal policy and its impact on long-term rates. Further, global interest rates, specifically in the US, are expected to remain low for an extended period of time.
As far as the gilt curve is concerned, we believe the long-end prices factor in most of the negatives, including inflation at 6% by March 2010, fiscal issues and likelihood of monetary tightening. However, the shorter end may see some upward movement if RBI acts to remove some of the excess liquidity in the system.

Debt schemes are doing well. Do you recommend pure debt schemes or hybrid funds such as MIPs to investors?
Investors must build their portfolios based on risk assessment. What this means is that investors must understand their investment holding period and ability to take losses.
For investors with low-risk appetites, hybrid funds provide a very good option as the fixed income component cushions the volatility of equities while over long periods equities provide significant capital appreciation.

Source: http://economictimes.indiatimes.com/articleshow/5082268.cms

Aggressive Intent

JM Financial Mutual now functions without any CIOs for either equity or debt.
The fund managers report to the Investment Advisory Committee, which comprises of board members.

Poor performance of equity schemes in the market downturn has hit the fund's reputation. And with the banning of entry loads, this AMC, known for its high upfront commissions, has a tough task ahead.
Bhanu Katoch, CEO JM Mutual Funds, shares his views on these very issues.

JM Financial Mutual Fund was the blockbuster during of the bull run of 2006 and 2007, only to hit rock bottom after that. What will you be doing to revive performance?
When the equity markets were in the bullish phase in 2006-2007, most of our mid-cap and large-cap schemes performed extremely well. They surpassed the indices by a huge margin. In the year 2007, Sensex delivered 47 per cent and the BSE Midcap index returned 68 per cent. Our large-cap category of funds gave a 1-year return in the 45-50 per cent range while our flagship funds delivered in the 90-111 per cent range. In fact, a few of our schemes figured in the top 50 Lipper world rankings.
The year 2008 witnessed the most severe fall in the history of the Indian stock markets. Sensex fell by 52 per cent and BSE Midcap index fell by 67 per cent. Against this, our flagship funds fell by around 65 to 75 per cent.
We believe that in India, growth as a strategy will tend to do exceptionally well over a longer period of time. So a high beta/alpha strategy portfolio will always deliver. We believe that our investment style will offer substantial alpha as and when confidence starts to come back and money starts chasing growth countries and growth stocks! If you look at the recovery period between March 5, 2009 and June 4, 2009 and even the period following that, JM schemes have done much better than the indices and even the peers. JM Basic Fund delivered 154 per cent during that period and JM Emerging Fund delivered 135 per cent. Our other equity schemes gave returns in the 70-150 per cent range. During this same period, the Nifty returned 77 per cent and the Sensex, 83 per cent.

Was that the reason for your relative underperformance in 2008?
Our underperformance was due to lack of cash and also due to our high beta/alpha strategy that definitely did hurt us in an exceptionally bad year.

What stopped you from going into cash?
Had we taken one, we would have performed better but having said that, a 2008 kind of year comes only once in 50 years or so and, therefore, it can't become the basis for any change in our fund management style. We do not believe in taking aggressive cash calls and only in extreme conditions will we use cash as a strategy.

What are you saying to your investors right now?
Our equity funds will stay true to their respective mandates. But we will ensure that while we stay with a high beta/alpha strategy, we do that with more liquid names.
So funds where the mandate is growth will continue to focus on growth even at the cost of short-term volatility. Most of our schemes have a mandate to chase growth and we will stay true to that even in the future. We believe the growth approach will provide maximum rewards to investors as India continues on its path to becoming an economic superpower.
So you are basically saying that your schemes will do well when the market picks up.
We feel that after a bit of consolidation the market will move up and we may see 17,000 within the next 6 months. In the next 2 years time we expect Sensex to rise above 25,000. Our schemes are well positioned for this kind of an upturn.

You spoke about more liquid names. Have you put any process in place to ensure that you do not have undue exposure to illiquid stocks?
All the liquid names in 2007 became illiquid in 2008. And what happened took the entire market by surprise. But several measures have been put in place since then. We have strengthened our parameters on stock and sector concentration, and stop-loss limits. Our risk parameters now have multiple "flag-off" levels which are more stringent than the regulatory requirements. We also have a more pragmatic approach towards risk management with multiple checks and balances. All these act as pointers for the fund management team to proactively balance the risk-reward aspects of their respective portfolios. And the IAC now has a greater role to play.

How do you want investors to perceive JM Mutual Fund?
We manage funds in 4 broad categories: equity, long-term debt, short-term debt and arbitrage.
On the equity side, we will stick to a high beta/alpha strategy. We believe that our investment style/growth approach will offer substantial alpha to investors in a growth market like India.
We are well known for our debt fund management capabilities. Even in the liquidity crunch crisis of October 2008, we did not resort to availing credit from the RBI's special window. We were the first to start arbitrage funds and are doing well in that category. We will soon be launching our PMS. Unfortunately in India, PMS is more a structured product with passive strategies. We may also start with similar products, but over a period of time we will look to innovate in this space.

You are a very small fund house whose equity returns got hammered in the fall of 2008. The competition is huge and that too from large and well established players. Is that not challenging?
I believe that the potential for growth of mutual fund industry in India is huge. One can easily compare that to any emerging market where the industry is large. If we take average AUM as a percentage of GDP, it is pegged at around 10 per cent in India compared to 80 per cent in the U.S. Even if you look at mutual fund AUMs as a percentage of bank deposits, it is only around 20 per cent in India as compared to 140 per cent in the U.S. Big-to-small is a wrong way to look at things. Finally, it will be the fast that will beat the slow! We want to focus on delivering performance and offering superior service standards to our investors and partners.
Recently, JM Financial Asset Management Pvt. Ltd. divested an 8 per cent stake equally to two global institutional investors, Valiant Mauritius Partners FDI Limited and Blue Ridge Affiliates, namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II, respectively. This sale of stake brought in Rs 63.86 crore. Prior to this, the AMC's paid up equity capital was Rs 54 crore. These players will add significant value from a global markets perspective.

How big is the investment team?
The equity team comprises of 10 members 4 fund managers, 2 dealers and 4 research analysts. On the debt side, we have a 5 member team comprising of 2 fund managers, a credit appraisal head, a dealer and a research analyst.

With no CIO in place for either debt or equity, who oversees the team and guides them?
Our fund management team is very strong and has substantial experience. They are accountable to the CEO and the IAC.
The team works very closely with the IAC that meets once every 15 days.

Your fund house is supposed to pay the highest upfront commission of 1.50 per cent. Will that hold you in good stead now that entry loads have been banned?
Because of the banning of the entry loads businesses will become more capital intensive. In the short term we will all need to work hard to adjust. But soon the industry will move from a high-margin-low-turnover model to a low margin-high-turnover one.
The institutional segment still contributes some 50-60 per cent of the AUM. In the coming days you will see retail contributing big time to the growth of the industry. Mutual fund penetration is still restricted to the top 8 cities and about 3 per cent of the households have invested in funds. There are 5,545 urban towns and 6,40,000 villages with a rural-urban mix to the ratio of 70:30. Incrementally, prosperity levels and literacy levels are going up and that means huge scope for growth.
IFAs will play a very critical role in the industry's growth. Once the PSU banks start selling mutual fund products, the penetration levels will only increase. There are 300 commercial banks with 72,000 branches.

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=100796

MF industry to see consolidation, says Mirchandani

In an exclusive interview with Harsha Jethmalani of Myiris.com, Mohit Mirchandani, Head Equity, Taurus Asset Management gave his views on equity markets and investment strategies.

>Do you expect the euphoric mood of the stock markets to last much longer?

Depends on the time horizon, short term, I expect a decline that will dent the euphoric mood temporarily. Medium and long term, we will be back on track to scale higher levels.

>Given the current trends in equities, which are the sectors you are watching closely?

We like the agro space, infrastructure theme, healthcare and consumption themes, oil and gas.

>Coming more specifically to your funds - what is your investment strategy? What are the key criteria you have in mind while selecting a stock?

The underlying philosophy is to look for favorable risk reward ideas. Constructing our portfolios involves multiple steps…
Step 1: We identify themes and sectors that we believe will play out over the next 12 – 24 months.
Step 2: We then select stocks on a bottom up basis within these high conviction themes.
We may also identify stocks that do not fit any larger theme, but are very good companies with good prospects, managed by capable professionals and have clean financials.

>As far as Taurus Ethical Fund is concerned you are overweight on the consumer non durables sector. Can you elaborate?

We are optimistic on the consumption theme in India. The companies within this space are high quality companies with huge cashflows, high ROE`s. We are optimistic on the consumption story.

>What innovative products can we expect from the company in near future?

We are constantly working on product ideas. When the time is right, we`ll launch the appropriate products.

>Do you think an equity fund should be fully invested or it should take active cash calls?

I think a fund manager should not hesitate from taking cash calls. Protecting an investor`s wealth is equally important.

>In these tricky times, how should an investor plan his investment?

A financial advisor is best positioned to deliver that advise based on the individual investor profile and needs.

>Where do you see the mutual fund industry a couple of years from now?

There will be consolidation. The temporary effect of SEBI`s announcements will be overcome – its a painful transition.

Source:http://www.myiris.com/newsCentre/storyShow.php?fileR=20090915113742173&dir=2009/09/15&secID=livenews

'You should always play the contrarian'

Sanjay Sinha is the chief executive officer of DBS Cholamandalam Asset Management, a joint venture between the Murugappa Group and DBS of Singapore. Prior to taking over as CEO a year ago, Sinha was the CIO of SBI Mutual Fund. In an interview with Ram Prasad Sahu, he talks about the global recovery, the need for support from the regulators, macroeconomic environment and investment themes that would play out over the medium term.

Given the state of the world economy what kind of recovery do you expect?

Right now we are at a phase where there has been a significant recovery from the pessimistic picture that was painted six months back. The big question today is whether this will take a ‘W’ shape or will it be something that will be sustainable from the point where we are today. In isolation, it is difficult to sustain this recovery which is why there is a need for continuous support from central bankers and governments to keep the integrity of the financial sector intact. The recovery in the form of a ‘W’ shape springs from the fact that when the financial sector and economies have shown signs of recovery, the commodity prices have moved far ahead of what the fundamentals would have justified.

What kind of impact will the deficient rainfall have on the economy and corporate earnings?

About ten years back, the Kharif crop (sown in summer/monsoon season harvesting in October) used to be 66-67 per cent of the entire agricultural production. And this crop is largely dependent on monsoon. Now, proportion of Kharif is down to 53-54 per cent, almost equal to the Rabi crop (sown in winter, harvesting in spring). Though the delay in rainfall will have an impact, if we do get rainfall before the season is out, a large part of the Kharif crop would have been saved. Impact would have been much larger if we did not get any rainfall now, in which case even the Rabi crop would have been at risk. The fact that we have widely dispersed rainfall through the country now means that the negative fallout which was earlier forecast would be lower. It is estimated that about 50 bps to the GDP growth rate is at risk because of the delayed monsoon and the cascading impact the rural economy has on consumption.

Is there more steam left in the markets?

Market levels are a function of liquidity, valuations and events. The primary driver for the markets recovery in the initial phase has been liquidity. The Indian markets started moving up from the early part of May. And it was not due to election outcome as results had not been announced but the rally was in tandem with the rally in the global markets. The second phase got accelerated due to an event which was the strong mandate for the UPA government. However, this was not an uninterrupted rally, there have been event risks which have put short term breaks on the market.
For example, the budget not measuring up to expectations did retrace the market. Thereafter, government actions in terms of policy be it the intention to roll out the GST or the New Tax Code have been positive for the markets. As far as valuations are concerned they are not static in time. What may be appearing to be fairly valued or expensive at a point may not be the same after two quarters have passed between that point of view and the earnings being generated by the corporates. If we are in a range bound market, earnings would have moved up in the three to six month period and the visibility of the future quarters would make that level justifiable.

Considering the EPS estimates for FY 10 and FY11, are the markets jumping ahead of fair valuations?

Earnings expectations for FY10 would be flat to slightly positive while that for FY11 would be growth of 15-20 per cent. If you look at a 10-year average for Sensex, the P/E ratio has been 15 times. So a Rs 1,100 EPS for FY11 would be discounted by about 15 times at 16,500 levels for December. However markets also move up and down due to liquidity. If there is liquidity there could be a premium to this number in the short to medium. Unless we get into the exuberance phase with P/E at 21 times or so, the momentum would still be strong.

Which sectors which would be lead the recovery?

We can sum up investment opportunities across four themes. The first would be domestic consumption, the second would be commodities, third would be infrastructure while the fourth would be linkages to global recovery. These four would cover all the available opportunities in the market Across sectors, from a risk return perspective the scale is tilted more towards the midcaps than the large caps irrespective of sectors.
The large caps have already shown discounting of the optimism in their prices, the midcaps are just about catching up. In the process, the valuation difference that had emerged between the large caps and the midcaps were not justified given the change in environment. Under the circumstances midcaps would perform better. Within the domestic consumption, there is today room for it to be stable part of a portfolio. In 2006, 2007, FMCG and auto took a back seat but in 2009 they are back in the reckoning as far as the core portfolio is concerned.

You should always play the contrarian. Today, there is a unilateral point of view that the IT sector is vulnerable because the order flows are at risk due to protectionism or due to shrinkage of company budgets. Both these negatives are being played up more than what they should be.

What are the challenges for Indian corporates?

The high cost of borrowing is one as the lending activity in India has not come back to levels witnessed in the early part of 2008. Last year we were clocking 22 per cent growth in credit and now down to 15-16 per cent. There has been a lull in capacity expansion because of the environment. The positive side of this has been that corporates have been able to conserve capital at a time when it was desperately needed. The negative could be if they have delayed capacity expansion, they may not be able to meet demand which is likely to emerge and of which there are early signs. The passenger car sales in the current financial year are up by 24 per cent. In cement, while capacity expansion has slowed down, dispatch numbers continue to be strong.

Should one invest in gold while its prices have passed the $1,000 mark?

Gold price domestically is more a function of the currency movement. In dollar terms, the gold price has not moved significantly but in rupee terms it has moved a lot. This is a commodity which is inelastic in supply and it has traditionally been a hedge against inflation and if there is a feeling that commodity prices would shoot up then this could be a hedge.

Source: http://www.business-standard.com/india/news/%5Cyou-should-always-playcontrarian%5C/369939/

Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund

Canara Robeco is a JV between Canara Bank, a 100-year old premier bank in India and Robeco, an 80-year old Rabobank entity and an asset management specialist. It is one of the fastest Growing Asset Managers in India, clocking 94% growth year-on-year in AU M (June 2009 over June 2008). It is the Lipper’s Bond Fund House of the Year for 2008 in India. Canara Robeco has an experienced fund management team with over 75 years of experience amongst them in Equities and Fixed Income.
Mr. Anand Shah, Head-Equities, Canara Robeco Mutual Fund joined the firm in 2008. He has done his MBA from IIM-Lucknow. Prior to this, he has worked as a Fund Manager with Kotak Mutual Fund for more than 6 years. He also worked as a co Head-Equities with ICICI Prudential Mutual Fund.
Speaking with Yash Ved of India Infoline, Anand Shah says “Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.”

What is your view on the Indian stock market at this point of time? Where do you see the Sensex by March?
In the short term, we are cautious on the stock market. According to us, the market has factored in a lot of recovery in the economy, domestic & overseas. We don’t see a rosy picture for the global markets next year. The large fiscal stimulus that has supported the markets across the globe will be rolled back partly or completely depending upon the recovery. We see little bit of caution in the markets given the current valuations and fundamentals. Valuations are neither low nor very high. Liquidity has taken the markets up so far, but we are not comfortable with the valuations right now.

What is your view on the Indian economy?
The Indian economy is more resilient than several other global economies. India will continue to grow at a decent rate. India’s FY10 GDP could hit 7%, though we see monsoon affecting the GDP growth rate by 100-150 basis points.
In terms of global markets, whatever green shoots we are talking about is nothing but stabilization of the economic deceleration. The emergency stimulus measures taken by governments around the world will get rolled back next year. As a result, the global economy could actually see another dip in growth compared to this year.
That is where we see an impact on global equity markets which in turn will have some impact on the Indian markets as well.
The global markets have already revived. It is the liquidity that is driving the markets. Otherwise, actually, the markets should be in a correction mode.

What impact do you see from govt borrowing?
The Government has to increase tax revenues and reduce expenditure to keep the bond market stable.

What is your AUM?
Our AUM is Rs84bn. Out of this, around 10% - 12% is equity and rest is debt.

How do you see inflation and interest rates?
We see inflation going up to 6-7% by March 2010, if food inflation deteriorates further.

What is your view on the rupee? What kind of flows do you expect from FIIs?
In the short term, the rupee would depreciate and the dollar will appreciate, and in the long term, the rupee will appreciate vis–a-vis the dollar
India has always been one of the top receivers of global funds and will continue to get money from the foreign investors. There will be bouts of risk aversion which may lead to some outflows. It depends upon fiscal policies pursued by the Government and the status of recovers in the global economy.

Which are the sectors you are bullish and bearish on?
We are bullish on sectors that are linked to the domestic consumption. We are bullish on Telecom, Banking, Power and Pharma and Gas Utilities.
We are bearish on Global Commodities and Metals – sectors that are dependent on global demand.

Any NFO(s) in the near term?
Currently there are some products in pipeline and we would launch our funds as and when we see an opportunity.

What are your plans on the distribution side?
We have done well since 1-2 years of its existence. We have tie ups with most of the banks and also we see huge potential in our Canara Bank distribution.

What is your view on the bond market?
We already have the yield on the benchmark 10-year government bond at around 7.3%. Inflation is also inching up and is likely to be at 6-7% by March. So, our view is that by March, the benchmark 10-year yield could touch the 8% mark.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=836&lmn=1

See new high for mkt in 1-2 years, buy on dips: Reliance MF

Madhu Kela, Head of Equity Investments, Reliance Mutual Fund, sees the Nifty setting a new high in the next 12-24 months on account of higher fund flows and economic fundamentals starting to move up. He advises investors to buy midcap companies which will perform and create value going forward. "Over the next 12-24 months, investors will see a lot of opportunities if they buy and hold." He recommends investors to buy stocks on dips.
Speaking on whether the Nifty can retest its previous lows, Kela says he does not see the Nifty breching 3,800-4,000 levels. "The only thing which could take Nifty to that level is if something globally happens."
On the recent spate of initial public offerings, he believes India Inc should have priced those issues at least 10-15% cheaper than where they were priced. However, he was quick to add that they stll makes sense from a long-term perspective.

Here is a verbatim transcript of the exclusive interview with Madhu Kela on CNBC-TV18. Also see the accompanying video.

Q: Do you think we formed a base now for the Nifty, we should not look too much southward of 4,000?
A: Yes. Going by what is being presented as of now and going by the trend of last six months, I would argue that the 3,800-4,000 level must hold because in the crossing over, 3,800 was a very big resistance to cross over. In the fall also, 3,800-3,900 was a very big support. Market took that support many times before decisively going down.

Q: Do you see in the course of this summer globally that Nifty retesting 3,900-4,000 kind of levels and if yes what could get it there because it is not going there, it is just taking support at higher levels of 4,300?
A: Too many people are waiting, I am also one of them because we keep getting money and we definitely have some cash.

Q: A lot of cash or a lot of it has been deployed?
A: No, I don’t think there is a lot of cash now. We have deployed it. For the last three-four months, we are deploying it.
I think the only thing which could take Nifty to that level is if something globally happens. The last two-three weeks for the monsoon have been reasonably good. So, there is something which has to go wrong globally for the Nifty to go back to 3,800-3,900 levels.

Q: You think the monsoon has discounted that for the moment?
A: Yes, because most of the part of the country has quite well rains in the last two-three weeks. In the south, there is excess rain. In northeast, northwest there are rains. North remains a matter of concern. For the country as a whole if you have one-two more good weeks of monsoon, then this fear may have been discounted.

Q: June, July, August we have spent in this broad range of 4,000-4,700. Do you think we are ready to breakout now or would that be surprising to you?
A: For various people market means various things. For a day trader, it is very important to time it for the day. For investors, we look for a consistent period of outperformance. Whether 4,700 is taken out in the next two months or it is taken out next month that is less important to me than saying that are we really heading for a new high in the Nifty in next twelve to twenty-four months. I think we are heading for it.

Q: Twelve months or twenty-four months?
A: Twelve to twenty-four months. The direction is very important and the most important thing for forming that judgement is you see the amount of liquidity which is being thrown in the world, which is running into trillions of dollars. Now, you are starting to see the real economic fundamentals also start to move up. Every data point which we have been observing for the last three months in the West has surprised and is optimistic. It is better than what the world was expecting. So, if you have a slow but decisive fundamental recovery and money coming into emerging markets because of the dollar being weak, then we should definitely head towards a new high in the next twelve to twenty-four months.

Q: In that sense, where are we compared to the last bull market? If you look back and think about 2003, 2004 where have we reached if this is indeed a multi-year kind of a bull cycle which has begun again in your eyes?
A: I think markets have seen a very sharp rise. Let us accept that because in March we were at 2,500-2,600 and now we are at 4,500-4,600, so it is like 80-90% rise. I do not think that there is too much beta. Can the pace of the rise which has happened in the last six months continue? To me, the answer is no. But will you have opportunities? This is the most interesting phase of the market where you take those stock specific bets and market is very skeptical about the run and valuations have run up. So, people do not have conviction to buy. This is the time if you can get those ideas and create alpha for your portfolio, I am finding it to be very interesting place to be in.

Q: You are saying that the easy money on the Nifty might have been made?
A: Stock specific there are humongous opportunities. In my opinion, if one is right in predicting the bull run and predicting India, you could find even companies today which are in the vicinity of Rs 5,000-15,000 crore market cap, that could go up 3-5 times over the next few years.

Q: When will midcaps recover? We have had a big run in the Nifty but many midcaps or even non-index largecaps are trading at 20-30% of their peak value. If you are saying that in 12-24 months the Nifty will get back to a new high, when will these stocks outside the index get back to their old highs?
A: Market is narrowing, so now everything will participate. You need a sizeable company. A company which is having Rs 2,000 crore market cap was like a midcap. Now, that Rs 2000 crore has become RS 6,000 crore and Rs 8,000 crore for many midcap names. If you compare it from the peak obviously they have not recovered to that extent, but if you see the leadership, if you see companies which are able to perform and create wealth, those companies are getting narrowed. As the market matures, obviously they will get even narrower. I don’t think one should expect a big bang, full-fledged recovery in midcaps. I see a lot of midcaps performing. That is where the real challenge is that are you able to identify that real alpha in this market to make that extra buck which is to be made out of this market.

Q: There were a lot of risk associated with the kind of stocks that you are talking about in 2008, balance sheet risk etc. Do you think the time has come now for investors to say I will not hide in a cocoon because I have a fear of losing my money, I will go out and take a little bit of risk now and by these kind of stocks that you are talking about?
A: I think people by and large will resort to this because if you look at the world, it is such a big paradox because so much liquidity is being thrown. At one end, people are struggling to protect their capital. In America if your money is in dollars and in the bank, your money is getting lost. So, emerging markets have done 50-100%. Similarly, index stocks have gone up like 50-100-150% in large companies and now some of them look richly valued from 12-18 months perspective. People have no choice but to look at qualitative midcaps. Let me make a distinction here. Just because we made a lot of money identifying these small companies and they became multibaggers, not everything which is small will become a multi-bagger. So, these are characteristics of these companies. If you bet money there, some of them still have a lot of value.

Q: You have been deploying a lot of cash over the last two-three months, you have been buying midcaps yourself aggressively in your portfolio?
A: Yes, we have been buying companies which have growth characteristics. In our scheme of things, if I think that the Nifty goes to new high, can this particular company if I am buying it at 10-12 P/E multiple and has a 30-35% kind of earning visible growth over the next three-four years, can we buy those kind of companies which are still at a discount? Everyone is not able to raise money, you are getting these opportunities, promoter themselves are wanting to sell some of these companies to you because they need capital.

Q: We went through a phase when the first big rise in the market happened when a lot of fund managers including hedge fund managers underperformed the index because largecaps did so well. Do you think in the next year or two, it could be turned around, where people with good portfolios beat the index quite a bit?
A: Absolutely. That is my firm conviction that you will end up beating the broader market if you do the right stock picking and hold it with conviction. The backdrop of this rise is that we have seen such turmoil times in October and December-January that everyone is very scared. People are not participating with a full heart in that sense. If I buy thing at Rs 100 and it becomes Rs 120-130, I am very tempted to book profits. People have forgotten in one sense what a bull market is like. Because everyone has underperformed, everyone is trying to catch up, so let me make these 10-20%. For sometime these 20-30% trades will work, but after that once you buy a stock, you sell it and then it comes off. You think it will come off a little more but if you are not able to buy it and if it goes higher than what you sold then mentally you are closed. You cannot buy that stock.

Q: That is why I have asked you about 2003-2004 because this exact phenomenon played out, people traded for a while and they missed the big 4-5 times kind of moves which happened over the next couple of years. Do you think we have entered that phase where if you buy and hold today, you can actually make multiple returns not just trade these 20% moves?
A: Over the next 12-24 months you will see a lot of opportunities if you buy and hold. If you have conviction, ultimately all of us are operating that given these circumstances you are buying a particular set of stocks, if situation changes then we will stand to change. But as things stand, if people will build a portfolio for next 12-24 months, they will stand to gain.

Q: How did you think the last few initial public offerings (IPOs) were priced because that is one conduit where a lot of people start getting in when they have been out of the market for a year because of a bad fall? Do you think they have left adequately on the table?
A: No. It is a little unfortunate part of the corporate India story that ultimately people know what is good for them in the long run but they cannot resist the temptation of the short-term pricing. If they leave some on the table, it is very good for them as a group and also for the broader market because retail investor is just creeping in. He is a poor fellow who has been out, has lost so much money that for 12-18 months he has not crept in. Some of these IPOs were filled even at a retail level by two-three times, you allow him to make money then he will come in the next IPO. I would have loved these issues to be priced at least 10-15% cheaper than where they were priced.

Q: Did you participate or you just let it be?
A: We have institution compulsion. If I had a choice, I may have skipped some of them. But in our overall scheme of things, it still makes sense from a long-term perspective. We participated, but did we participate with vengeance that this is my idea and I want to put a lot of money to work? The answer is no.

Q: What about the qualified institutional placements (QIPs)? Are you letting a lot of them pass or are you participating?
A: No, I am letting a lot of them pass. We have been selective. The problem is that there are ten merchant bankers and everyone is advising the management on the best price one can get for the issue which is never good for investors because we don’t want to buy the best priced companies, we want to buy a risk return reward. We have participated in a few of them and we have made money. I wouldn’t say that we have a closed mind that I don’t want to participate in QIPs but we want to participate wherever we can see risk reward.

Q: You spoke about liquidity and a lot of money which is coming into emerging markets. If that is true, then commodities should also do well once again, are you backing commodity stocks?
A: Yes. By and large, we have a overweight position on commodity stocks.

Q: Across the board?
A: Yes, in a lot of portfolios.

Q: Not just metals, even sugar etc?
A: Yes. We have some bets in sugar. Let us say you take three-four countries which one is positive about ‑ China, India, Brazil and Indonesia. I don’t understand too much of Russia so I am keeping that aside. These four countries put together is like 50% of the world population and these countries like China is at USD 6,000 per capita income, India is at USD 2,800, Indonesia is at USD 3,900 and Russia is at similar levels. Over the next five years, you will see at least 30-50% rise in per capita income of these countries. On one hand, you have a subdued growth in these developed markets and on the other hand you have per capita income rising in these countries. With such a large domestic base, money will flow in bunch to these emerging markets. Within that, I think India will be a very big beneficiary because if you have a standalone story then to go and pitch to USD 500 billion pension funds becomes difficult. But if you are part of the bunch, then allocation of money to India will become much easier.

Q: What is the sense you get when you speak to fund managers globally now? Have they reinvested or are still short?
A: A lot of them are still skeptical, underweight, playing it very fearfully. I don’t think a lot of people are still yet to pay with high conviction. I bought X at Rs 40, I sold it at Rs 60, but I don’t think that is the real conviction is what I am able to see.

Q: Are they at least feeling that they have missed out or not?
A: Yes, 100%. We felt that because we were sitting on cash from November 2007 to February. So for 14 months we protected our funds. You get little carried away with your own success and so is the case with lot of people who have been right in predicting the last downfall.

Q: So, you are saying even you have not moved as swiftly as you wanted to?
A: I would have left more swiftly but at least we have an open mind. I think markets have made us much more humble in last 15 years to accept that yes we were wrong and have to carry on with life. So, we are carrying on with life, we are looking at opportunities on a daily basis and have taken large bets in the last four-five months in select companies. We have invested money wherever we like.

Q: You bought things in pharma which was considered a defensive sector, what attracts you in that theme?
A: That has been my biggest call and it has done very well. Even today, the opportunities are 3-4 fold. The penetration level in the pharma sector is very low. Insurance is picking up. You have people who are getting insurance, there are better medical facilities, so the consumption of medicines and medical-related services in the domestic market with this rising per capita income will go up sustainably higher over the next 5-7 years. There is opportunity in the contract research and manufacturing side. You can higher a PhD for Rs 50,000 do your work here. I see a big opportunity like USD 50-60 billion of spends on an annual basis. Can a substantial portion of that move to India? The answer is yes. In a multinational space, if you see, we have started to adhere to patent laws in 2005. It took one to one-and- a-half years for the multinational companies to be convinced that yes we are serious about it.
If you look at the multinational pharma companies, they are available at ridiculously low levels and at historic low valuations. Will it pay off in six months, I don’t know, but will it pay off. In my timeframe of 3-5 years, I am very convinced. Even now you can get into the pharma sector. A lot of these companies are listed at 10-12-13 times PE multiples with a growth rate which could be 20-30% over the next 3-5 years.

Q: Which one of these spaces are most attractive, because not all companies do all of these strong domestic formulations or contract research which you outlined?
A: It will be purely stock picking. Basically, there will be companies which will be in contract research and manufacturing and you have a great management and you buy it and there will be players who would be very strong in domestic side of business and there will be ones who are committed to a MNC. The only caveat which I would like to tell you is that all of them want to delist and want to own 100% of their companies. So, you have to be with the person who has clearly spoken that I am for minority shareholders.

Q: In delisting, candidates can give it back to parent, is it?
A: Yes, but at the price at which they want to buy this. They feel that if the price is Rs 250 and if I pay Rs 400 then I have done justice to the minority shareholders, but no one is near to paying what their long-term potential is.

Q: In the last bull market, the big money was created by infrastructure and bank. Do you think it’s a good chance that they deliver again in this run or you are not as bullish on these two?
A: I think it will be selective. We had a big bull run in technology between 1998 and 2001 where in a lot of people bought it and about 400 tech companies got created. After the burst, we saw that even Infosys or Satyam will die. So, they took some time for the dust to settle down but that list of 400 became actually 15-20 companies for the next bull run to take on. I see a similar kind of a thing happening at some point of time in infrastructure, though it is too early. We haven’t yet played out the full bull run of the infrastructure sector, so you will still have a lot of companies participating. What the Finance Minister has indicated, if you see 9% of our GDP going into Infrastructure, that’s a very large number even though it is 3-4 years down the line.

Q: When you say infrastructure, do you include real estate there or not quiet?
A: I would be still very skeptic on real estate because we really don’t understand them. They bought land 15-20 years ago and I am paying the current market price of that land in my spreadsheet. Within the real estate sector, you see some big winners. Our search is that can we really pinpoint those companies and can we buy at the right risk-reward and at the right price.

Q: Are you now saying that in every big dip in the market I just get more and more invested and I ride this for 2-3 years?
A: Yes, that is currently my motive. We are always open and examining what could go wrong. We are working on more things as to if A, B, C, D, scenario emerges, can it last for one month or three months or even more. One big concern which I have is on Europe where still the banks are leveraged 50-60 times. A country like Switzerland is leveraged 3-4 times as a country as a whole. So, will this fizzle out at some point of time in the market, yes it will. Am I able to see that today, I am not able to. So, we have a list of stocks which we want to get invested into and buy into every dip, but at the same time we are keeping our mind open that if the global worry plays out at some point of time, can we readjust our portfolio?

Q: What would the top 2-3 things you would watch for which would tell you that things are going wrong globally and you need to move a lot of money to cash again?
A: One will be Europe which I would be very carefully watching. Second is this whole thing about China. There are lots of tail winds right now. The loan growth is like seven trillion yen in the first half of the year. The big bet about China is that if the global market recovers and if the export side of this story recovers much better as compared to what it has been in the last 6-9 months and they continue to stimulate the domestic consumption, then we might be able to play off. But that still needs time to play out. We have to watch whether the Chinese exports which had hit an all-time low in October-December of last year can really pick up. In the meantime, can the Chinese economy be sustained on that one engine which is domestic?

Q: In the pit of your stomach, do you get that feeling that we are in a bull market again?
A: Yes. I had mentioned that earlier too. The good thing which I think which humbled me personally over the last 15-17 years is that you have always the right to go wrong in the stock markets. What is important is how early do you correct and how much more time you spend on your own hypothesis, disregarding the world as it is developing. We went wrong for 2-3 months and we could not invest in those months as we could have invested, but we took a note and I am very clear that every dip in this market is a big buying opportunity.

Source: http://www.moneycontrol.com/india/news/mf-interview/see-new-high-for-mkt1-2-years-buydips-reliance-mf/413329/3

Midcap, smallcap MFs zoom 130% since March

Midcap and smallcap mutual funds are zooming up on the returns chart, outperforming benchmark indices. The top performing funds have given 130% returns since March this year.

The midcap stocks and small cap stocks are buzzing and so are the midcap funds and small cap funds.
Srinivisan Iyer, Equity Fund Manager, SBI MF said, “When we talk about midcap as a group, we are talking about an index and within the index there will be standard deviation. As a group midcaps tend to outperform in a rising market, they tend to underperform in a falling mkt purely because the beta in a midcap is very high. So, your call on midcap is a function of what u think the market is going to do. If you catch the right stocks you can do pretty well compared to the benchmark or your peer set. We like the media space within consumer discretionary, we like specific sectors within consumer staples, we like midcap IT, we like midcap pharma.

Source: http://www.moneycontrol.com/india/news/mf-analysis/midcap-smallcap-mfs-zoom-130-since-march/413342

Mutual fund managers comment on RBI's policy

The RBI left key rates unchanged at its first-quarter policy review on Tuesday. The bank said it expects the economy to grow 6 percent this fiscal and inflation at 5 percent by end-March 2010. The Reserve Bank of India also said it will maintain the accomodative stance of monetary policy until robust signs of recovery are visible, adding that its exit strategy will be modulated in line with macro-conomic developments.
Following are comments from mutual fund managers on the policy review:
RAMANATHAN K, HEAD-FIXED INCOME, ING INVESTMENT MANAGEMENT: "The status quo on key rates were in line with expectations. The policy maintains a balance between the nascent recovery and the need to nurture the recovery and the necessity to moderate the accommodative stance when inflationary trends emerge. "The RBI has also upped the inflation expectation to 5 per cent from 4 per cent by March 2010, again something which was expected by the market. With no surprises in the policy we expect the market to shift focus to the government borrowing program. "With front loading of the borrowing program, the supply is expected to reduce as we go along which would be positive for the markets in the short term. However with growth picking up and inflation rearing its head towards the end of the year we expect yields to head higher in the medium term."
LAKSHMI IYER, HEAD-FIXED INCOME, KOTAK MAHINDRA MUTUAL FUND: "Accomodation in stance to continue for now but not for eternity as macro economic situation may warrant change in stance in future. "Shorter end of the curve to remain supported. Longer end to trade range bound in response to OMO purchase and auction supplies."
MAHHENDRA JAJOO, HEAD-FIXED INCOME, TATA ASSET MANAGEMENT: "It's pretty much in line with expectations. People were expecting rates not to change and RBI to reassure about the credit policy till economic growth pick-up happenes. "I don't think there is any significant move in the bonds.

Source: http://economictimes.indiatimes.com/News/Economy/Policy/Mutual-fund-managers-comment-on-RBIs-policy/articleshow/4829103.cms

‘Asset management is a low-margin business globally’

I find it difficult to envisage funds in India taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices. That’s why we have to rely on third party distributors.

Mr. HARSHENDU BINDAL, PRESIDENT, FRANKLIN TEMPLETON INVESTMENTS INDIA

He would like to see the Indian mutual fund industry evolve to manage assets for different classes of clients — retail, high net worth and institutional, says Mr Harshendu Bindal, President, Franklin Templeton Investments India. Explaining h ow the Indian MF model is very different from the West, he also talks of why the industry may find the transition to a zero-entry load regime challenging in the short term.
Excerpts from the interview:
You have overseen Franklin Templeton’s operations in several regions before taking up this India stint. Would you say a fund-house focussed wholly on retail investors is not viable in India?
It is not a question of being viable; there are certain fund houses globally which do focus on retail clients alone. But my question is: why restrict to one segment alone?
I would like to see the mutual fund industry in India grow into an asset management industry which manages assets for different classes of clients — retail, high net worth and institutional investors. If you look at the way the Indian industry has grown, you will see that almost half the money managed is invested in liquid and liquid-plus segments that reflect corporate flows, and only half is in the retail segment.
Given that we have over 38 different fund houses managing just $120 billion; that limits the scale advantages to players. Globally, asset management is emerging as a low-margin, high-volume business. At one point in time, in the global context, $500 billion was considered a large asset size. Today, there are funds managing even $1-2 trillion.
The other point is that if you look at the developed markets such as the US, the bulk of the money comes into the industry through 401K benefit plans and pension plans. That the fund industry cannot meaningfully participate in either of these segments in India is a big constraint.
Even in the US, the proportion of funds sold directly is not high.
Is that because expanding distribution requires massive investments?
Unlike insurance or banking, the mutual fund business is a low margin one. In fact, the asset management industry does not invest directly in building a large sales force in any part of the world. Clearly third party distributors are very important.
Currently there are only 75,000 AMFI certified agents in the country which is very low for a country India’s size. That entails a lot of education and investment; the low margins of the industry are not allowing it to make that investment.
Seen in that context, how will Franklin Templeton react to the entry load waiver on mutual fund schemes proposed by SEBI?
The objective of the move is clearly to benefit clients through reduced fees — that is largely a good goal. However, operational challenges over the short term need to be addressed, as distributors/fund houses evolve suitable business models. Also, as we have been saying, there needs to be parity amongst different financial service providers in terms of regulations and transparency.
The challenge is that if funds cannot compensate distributors, they will have to seek it from clients, who might not be amenable to paying over the short to medium term. As distributors have the choice of selling other products, there may be pressure on AMCs to compensate distributors out of their revenues relatively more, compared to current levels.
As fund houses do operate under fee structures that are controlled, there may not be steep price differentials among fund houses. Even when we talk about increased trail fees (recurring fee paid to the distributor), there isn’t much room. Therefore, I don’t see us returning to the old revenue streams for distributors or manufacturers. We have also seen similar moves in countries like Australia and UK, but the effective dates are 2010/2011, giving room for seamless transition.
Franklin Templeton will continue to focus on selling products through its distribution partners. I find it difficult to envisage funds taking their products directly to clients. The awareness of funds is not very high, and the average retail client is not very comfortable deciding from the vast array of choices.
But is it really so difficult to get investors to pay a separate fee? Retail investors do pay separate brokerage on equity market transactions.
When you compare mutual funds to equity, it is important to know that the fee on equity investments is based on transactions which are quite frequent. With funds, the investments are expected to be of a longer duration, with the fee being collected mainly for advice. When you have a longer duration in mind, you cannot operate on a transaction-fee equivalent.
Can an online platform where investors buy funds directly, replace the traditional distribution channels?
An online platform would be suitable for clients who are well-informed and are only looking for convenience. But we feel that Indian investors, by and large, are not that well aware and do need advice from distributors on choosing between products. The second disadvantage that I see with online platforms is that clients have tendency to get into a trading kind of mindset.
With funds, it would be better if clients took a long term approach and tailored their investments to a proper financial plan based on their needs and risk profile.
Investors in India do tend to chase returns. So have you seen inflows into your equity funds pick up after the post-election rally?
We are beginning to see a lot more interest and activity from investors. Call volumes to our call-centres have actually tripled and we are witnessing flows into our equity funds.
We believe that timing becomes less of an issue with a longer investment horizon and that’s what we tell our investors.
We have consistently held that timing the market is difficult. When this rally happened, for instance, not only retail investors, but many investment professionals were caught off guard!
How is your new theme fund- Franklin Build India Fund differentiated from the host of other infrastructure funds?
Through this fund, we are looking to offer investors access to a wide range of themes in one single offering, representing opportunities in the key building blocks of the Indian economy.
The way we look at it is - there are three main constituents of the economy, investment, consumption and exports. FBIF focuses on the investment side. We at FT are launching a new fund after a long time. We try to launch products that are sustainable over the long term. When we look at new products, we see if the product is different from our existing products and if it presents a sustainable idea.
Isn’t the investment theme overheated, with much of the stock market action happening around the public spending theme in recent months?
We don’t look to timing the market when we launch our funds. We looked at valuations for these sectors and they were either at or below long term averages. That suggests that, from a valuation perspective this isn’t a bad time to invest in these stocks. The question is whether we find enough value for the medium to long term — which we are finding at this juncture.
Typically we have found theme funds holding large cash positions and underperforming diversified peers over the last one year. What is your stance on this?
One, we tend to be fully invested in our equity funds and as a fund house, we do not take cash calls. We think that has to be taken care of by the advisor and the investor when the asset allocation is decided on.
That’s the reason why we also looked at a more diversified theme and not just physical infrastructure. Through this, we hope to have more opportunities across market cycles.

Source: http://www.thehindubusinessline.com/iw/2009/07/26/stories/2009072650110700.htm

India rushes to beat ban on entry fees

Indian mutual funds have been working against the clock to push new products on to the market before a ban on entry fees that asset managers charge investors becomes effective on August 1. 

Since the investor-friendly move was announced on June 18 by the Securities and Exchange Board of India, the country’s market regulator, nine new funds have been put on offer by asset management companies. 

The mutual funds that have rushed to launch products in the past five weeks include big enterprises such as JPMorgan, Franklin Templeton, DSP BlackRock, Religare Asset Management as well as other, smaller operators. 

The ban on entry loads – the 2.25-2.5 per cent fee mutual funds charge investors on schemes, which is used by money managers to pay distribution commissions – is seen by insiders as being a paradigm-shifting reform for the Indian market.

“This is one of the most significant changes that the mutual funds industry has seen in recent times,” says Sanjoy Banerjee, executive vice-president of ICRA-MutualFundsIndia.com, a local rating agency.

“It is a positive move for the benefit of the investor community, for the benefit of regulation and for the transparency of the mutual funds industry.” 

However, the ban is also likely to have a negative impact on India’s $137bn (€96.4bn, £86.2bn) mutual fund market, because distributors will have less of an incentive to promote new products offered by mutual funds.

“In the short term there will be disruption to business, as distributors will try to find other products that reward them better,” says Naval Bir Kumar, chief executive of IDFC Asset Management, which has about $5bn under management. 

“Clearly there will be a reduction in business and activity will slow down. The ban will change the intermediation that currently exists, because the revenue pool that fund managers and distributors today work on and which they share between themselves will be reduced from August 1 onwards.” 

Fund managers also fear that, in the short term, they may face growing competition from insurance and pension funds, since distributors are likely to market more products similar to mutual funds that have not been hit by the entry load ban. 

Mr Kumar says: “In the future you could see a shift away of sales to other investment products . . . you could have insurance companies trying to create products that look very similar to mutual funds products but without the pricing restrictions which are being imposed on us.”

However, over the medium to long term, fund houses and distributors are expected to revamp their business models and will look for new pay-out structures, according to Sukumar Rajah, chief information officer at Franklin Templeton India.

“Distributors will evolve an advisory fee model and will also get remuneration from fund houses for distributing products either in terms of upfront or increased trail,” he says. 

The ban is expected to have a big impact on the way distributors take care of their clients, according to market analysts.

“Distributors have not evolved in India. They don’t give specific services to investors,” says Mr Banarjee of ICRA-MutualFunds . 

“What has been happening until now is that once a distributor sold a fund he forgot about the investor. Now he will have to continue to be in touch with the investor, providing real services, so that the investor feels obliged to pay the distributor.”

The consensus among fund managers and analysts is that investors will benefit substantially from the new market changes, as products will become cheaper to buy. 

This, coupled with the return of strong market sentiment – the Bombay Stock Exchange’s benchmark Sensex index has risen 32 per cent so far this year and has almost doubled since March – is likely to spur a new wave of investments in mutual funds.

“We have witnessed a sharp increase in foreign institutional investors’ interest in the local markets – $6.6bn in the quarter ending June 2009,” says Mr Rajah of Templeton. “Hence, [in spite of the ban] the medium- to long-term prospects continue to be positive for the industry.”

Mr Kumar of IDFC also believes that the short-term fall in product launches from August 1 onwards could be compensated for by a strong market performance and more active mutual fund investors. “Most investors believe the rule change is a good move; it will make investors a bit more proactive. So when I talk to my team I tell them that if the end consumer is happy, then this can’t be really that bad for us,” says Mr Kumar.

Source: http://www.ft.com/cms/s/0/aeefc570-787d-11de-bb06-00144feabdc0.html

Positive earnings have surprised mkts: Motilal Oswal AMC

Earnings of individual companies have surprised markets on the positive side, Nitin Rakesh, CEO, Motilal Oswal Asset Management, said. According to Rakesh, there were many investment themes that looked appealing. “If you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market,” he said. “Overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.”
Here is a verbatim transcript of Nitin Rakesh’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: I believe you and Raamdeo Agrawal have been touring the foreign seas, what is the mood right now on India are people still as bullish as it seems to look on the good days?
A: One thing is very clear that over the last six-weight weeks especially after the big election news, we are on the radar and a lot of people have watched us with interest, but there is still a sense of apprehension for two counts, one while the feel-good factor is back and we are on the radar, they are expecting a lot to be done by the government as is the anticipation. So, for example, they would like to see some concrete moves on the reforms front, they would like to see some progress being made on the infrastructure front. The second apprehension comes from the fact that because of our short move in the market — 80% plus — suddenly there is a sense that the big move may have been over for now and there is a sense of caution so there might be some people who may have gone underweight over the last few weeks in terms of what their weightage was and what it is today.
The overall appetite seems to be good, it’s for us now to follow through with the actions on the reform front, on the infrastructure front, FDI — insurance is one of the big things that people are watching out for because insurance being such a large part of the global financial markets, there is a fair sense of disappointment over the past few years that we haven’t been able to move the reforms needle upfront. That one regulation on FDI, 26% versus 49% will have a major impact on the way we are perceived on a reforms perspective and also there are a whole host of other things that they would like to see.

Q: Would you concur that the big move is done for the moment and the market needs to consolidate here and catch its breadth or do you think it can run past its intermediate highs and climb a whole lot higher by the end of the year?
A: We have to look at it from an overall perspective; I talked about the same issue a few weeks ago when we said that whether the market is cheap or expensive, that depends on what your earning estimates are. So if you look at it from an earnings estimate perspective, while we were in mid-teens valuations, that seemed fairly valued but given that there are a lot of positive surprises coming out of the earnings both from profitability perspective and even some topline growth numbers. We may have underestimated the impact that earnings will have on the market.
We are probably the only country in the world where the overall aggregate profit number for this quarter the June ending quarter will be higher than the profit number in any quarter ever. Those are obviously things that get hidden behind all the noise. So if you look at it from purely the ability of corporate to grow, the economic growth, demographic profile, it doesn’t look like we have to worry about the overall trend of the market.
If we look at real short-term movements, whether it’s going to go past 4,650 before 4,200, that’s a question of momentum, volatility, capital flows and the tug-of-war between bulls and bears so that’s very hard to call. But overall we are still cautiously optimistic, the idea is not so much a call on the overall market, there are investment themes out there that are so appetizing that one has to make sure that your portfolio does include those things. So it’s not a question of just a top-down call on the market, it’s a question of whether is there an opportunity to create wealth even at these prices and we believe there is.

Q: Do you sense any hesitation in capital commitment because more or less aside from a couple of slip-ups, companies haven’t had any problem raising cash whether via QIPs or GDRs?
A: There is a fair amount of appetite for the right investment themes. For example, infrastructure seems to be one of those themes where before you could talk about the India story, people would ask you about what have you thought about the infrastructure opportunity in India. So for themes and stories that people have accepted as opportunities, I don’t think there is dearth of capital.
If you see the issue form the top down perspective, we are still seen globally as from a global investor’s point if view especially an institutional or a retail investor point of view, we are still seen as a small volatile market and exposure taken almost always is within the emerging markets, and within that BRIC was the buzz word and its now becoming BIC, so there is some money flowing into us in lieu for the markets but that is still very small exposure and that will only change if the stories that are being out there actually turn into reality, but I don’t think there is any dearth of capital and there is a fair amount of liquid money lying in the government treasuries globally and that will move into riskier assets as it has been moving and the level of comfort with the global economy is much better today. If we talk to people on the street in New York for example, everyone has a view that the worst is behind us now things look better, the banking numbers and the consumer numbers are looking better. So there is no dearth of capital or the fact that people are not willing to commit capital. The issue is: can you get the story out of there, can you make sure that there is follow-through on those promises?

Q: There has been a lot of talk this quarter about how best to approach technology post its earnings where do you stand?
A: I am cautiously optimistic because there was so much pessimism in the prices, what we have seen over the last few days after the results is essentially a reversal back to the fair value; technology continues to be a clear play on global recovery, the initial signs are that it is stabilizing, the larger companies held the operating leverage so I would actually be positive on this sector overall.

Q: How would you position yourself in the telecom sector now given valuations and given the kind of earnings that you are seeing?
A: Bharti has continued to demonstrate leadership at every level and there is obviously a big event with the company because of the MTN merger but we have presentation of about 40% at this point in time so 400 million plus subscribers on the base of about 1 billion population, so there is still some steam left, the larger players obviously have a bigger leverage because of the cost and profitability factor. We would continue to stay focused on the leaders in this space but still stay invested in this sector.

Q: How are you approaching commodities as a space right now, not so much with what’s happening with energy but the metals basket?
A: The overall commodity space has continued to move up globally as well, so there is no reason to say that one has to take a cautious view so we have to ride the momentum of the commodity boom. Whether we are going to go back to situations that we saw two-three years ago, we have our doubts but clearly there are cyclical plays out there that we continue to focus on, every commodity almost, globally has been demonstrating a strong upmove so there is momentum and opportunity out there.

Q: Do you track Sun Pharma, it’s lost some of that premium valuations now.
A: The news emanating out of the US subsidiary is not that great and there will be an overhang on the stock, I haven’t tracked the developments of late, there might be some more days before we really see this one out of the woods.

Q: What are your thoughts on cement as a sector?
A: This is one of the sectors that continues to give positive surprises right from Q4 of last year, so we continue to stay positive, we have tracked a lot of the cement companies closely, we still believe there are opportunities across the spectrum in the cement sector including some of the midcap names out there. So the results will ratify this later on in the next few days but there is opportunity in the cement sector.

Source: http://www.moneycontrol.com/india/news/mf-interview/positive-earnings-have-surprised-mkts-motilal-oswal-amc/407537/1

Sebi cap on investment period hits liquid funds' assets

The Securities and Exchange Board of India’s (Sebi’s) guideline that liquid funds can no longer invest in papers of more than 91 days’ tenure has led to a sharp fall in their assets under management (AUM).

This, coupled with a fall in returns of short-term (three months) securities and bonds, has added to the woes of fund managers. Mahendra Jajoo, head, fixed income and structured product, Tata Mutual Fund, said, “Returns from short-term papers have slipped quite sharply, leading to a fall in returns from liquid funds by 275-300 basis points.”
Annualised returns from liquid funds have slipped from 7-8.5 per cent a year earlier to 4.5-5 per cent now, as per the industry estimates. According to data from the Association of Mutual Funds in India (Amfi), investors withdrew Rs 34,378 crore from liquid funds in June.
Navneet Munot, chief investment officer, SBI Mutual Fund, said, “As per Sebi guidelines, fund managers cannot invest in papers of more than 91 days, which has adversely impacted returns of these schemes.” Earlier, fund managers were able to generate higher returns from this category by investing in a judicious mix of short- and long-term papers.
However, fund houses may find themselves in a serious trouble if there is a run on liquid schemes because longer-term papers have to be sold at a discount. This is likely to hurt existing investors because of a fall in net asset value of these schemes. Liquid funds are short-term debt funds that offer investors the option of withdrawing their money at a very short notice, ranging from overnight to just over a week. Investors, especially companies and banks, prefer these schemes to park their short-term funds because of quick entry and exit options.
Experts said that money from liquid funds had shifted to ultra short-term funds (a reincarnation of liquid-plus funds). In ultra short-term funds, the lock-in period is five days (liquid funds have no lock-in).
Liquid funds face taxation on two fronts. First, there is a dividend distribution tax (DDT) of 28.32 per cent. Second, there is also a short-term capital gains tax of 33.9 per cent for the highest income bracket. For ultra short-term funds, while there is a lower tax incidence of 14.2 per cent of DDT, short term capital gains tax remains the same.
Also, the ability to invest in longer-term papers of say 150 to 180 days helps them generate better returns. For instance, while liquid funds, returns are at 0.33 per cent per month, ultra short-term funds return 0.44 per cent. “Ultra short-term funds were investing in papers of up to one year, which helped them generate better returns,” said Jajoo.

Source: http://www.business-standard.com/india/news/sebi-capinvestment-period-hits-liquid-funds%5C-assets/364730/

FUND VIEW-Shinsei sees 15-25 upside for Indian stx in 1 yr

* Correction possible but rules out return to March lows
* Valuations sustainable, sees corporate earning upgrades
* Expects boost in capex, pick-up in inventory levels

Indian shares may gain 15-25 percent in the next 12 months backed by earning upgrades, pick-up in the capex cycle and growing signs the global economy is on the mend, a top fund manager said. While a 10-15 percent correction was a possibility, stocks will not drop to 2009 lows hit in early March as every dip would attract investors sitting on the sidelines, David Pezarkar, head of equity at Shinsei'sIndian mutual fund unit said.
"Small corrections apart, I would say market continues in the upward trajectory," said Pezarkar, whose firm will launch its first equity fund in India next week.
"It doesn't look like we will see some shocking kind of changes happening. Plus, globally I think a lot of economic indicators will turn positive over the next six months and that will surprise a lot of people," he said.
The fund manager recommended investing in sectors such as auto, technology and metals, where he sees a bounce-back in the short-term, but prefers infrastructure as a long-term bet.
Indian shares .BSESN have staged one of the best comebacks in the world this year, rising more than 85 percent from a low hit on March 6. They now trade at nearly 17 times their forward 12 months earnings from close to nine times in March.

While a surge in valuations was making many investors wary, Pezarkar said they were sustainable and would get a boost as economic activity picks up going ahead, and could spark faster earning upgrades, mainly in 2010/11.
Fears companies might apply the brakes on their capex spending because of a fund crunch or lack of demand had subsided.
"Now it seems at least the announced capex, which was under threat of not happening, at least that, will happen," he said.
Pezarkar, who managed about $2 billion for insurer Bajaj Allianz before joining Shinsei in October last year, said the government's thrust on infrastructure and stimulus targeted at raising consumption will boost economic activity.
Output of India's infrastructure sector, which accounts for a little over a fourth of industrial output, grew 6.5 percent in June from a year earlier, higher than an unrevised 2.8 percent in May, government data showed on Thursday.
Stake sales in state-run firms should add strength to the rally in Indian shares, said Pezarkar. He forecast a pick-up in inventory levels, where the drop outstripped the fall in sales on fears the global economic woes would linger for 3-5 years.
"If things stabilise then companies will have to build their inventories," he said, adding production, exports and trade figures should also see a sharp bounce-back.

Source: http://in.reuters.com/article/domesticNews/idINBOM15762420090723?pageNumber=2&virtualBrandChannel=11584&sp=true

Mr. Bhanu Katoch, Chief Executive Officer, JM Financial Mutual Fund

JM Financial Asset Management Private Limited, the Asset Management Company of JM Financial Mutual Fund is sponsored by JM Financial Limited. JM Financial Asset Management started operations in December 1994 with a launch of three funds-JM Liquid Fund (now JM Income Fund), JM Equity Fund and JM Balanced Fund. JM Financial Mutual Fund offers a bouquet of funds that caters to the diverse needs of both its institutional and individual investors. Recently, JM Financial Asset Management Pvt. Ltd. divested 8% stake to two global Institutional Investors, i.e 4% to Valiant Mauritius Partners FDI Limited and 4% to Blue Ridge Affiliates (namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II respectively) thereby infusing Rs 638.6mn. Prior to this, the AMC’s paid up equity capital was Rs 540mn. These prominent hedge funds understand the asset management business globally and have brought with them a significant value-addition from a global markets' perspective.

Mr. Bhanu Katoch, Chief Executive Officer, JM Financial Mutual Fund, is a B.Com, PGDM (Marketing & Sales), MBA, and has around 12 years of experience in the Telecom & Financial Services industries. He started his career with BPL US West Cellular Ltd. Subsequently, he has worked with various organisations in the financial sector like Pioneer ITI AMC, Alliance Capital AMC, Tata AIG Life Insurance Company, ABN AMRO AMC and Lotus India AMC.
Speaking with Yash Ved of India Infoline, Bhanu Katoch says, "Year 2011 to 2016 will be the golden era for the Indian economy and the stock markets."

What is your reaction to the budget?

The finance minister presented an expansionary budget with a clear focus on growth revival. The revised fiscal deficit for FY 2009-10 (6.8% as compared to RE of 6.00% in FY 2008-09) came as a shock to the market. The higher fiscal deficit spooked both the bond and the currency markets. In a knee jerk reaction yields on government bonds rose across the curve. Market has overacted to the relatively higher gross borrowing programme. I think a lot was expected out of the budget. My expectation was more on the direction side rather than any specific roadmap. Although budget was low key and there would be worries on the fiscal front, what comes across as comforting is that the revenue estimates presented in the budget are quite conservative.

What is your reaction to SEBI’s move to do away with entry load? What are you hearing from your distributors?

Industry will adjust to whatever changes are made. In the short term though, there will be some difficulty. This business will become more capital intensive. In the long term, distributors will grow based on the quality of their advice.

What is your AUM?

Our Assets Under Management is Rs80bn. Out of this, Rs25bn is in equity.

Where do you see inflation and interest rates going ahead?

Three factors to keep in mind which will influence inflation forecasts :

a) Monsoons, which were earlier weak but in the past week has improved significantly. Overall, rainfall is still at 36% below normal;

b) Government borrowing programme of Rs4 trn and

c) Global commodity prices including oil (we have seen a price fuel hike of 10% few weeks back). We believe Headline inflation is expected to remain in the negative territory for a few more months and then should move up from there to reach a level of around 6% at the end of March 2010
Interest rates will also be influenced largely by the governments borrowing program and the credit pick-up in the economy in the second half. We expect interest rates to remain benign for the next 3-6 months. The government borrowing program will result in yields moving up further from here to around 7.5%. However, excess liquidity in the system and the credit growth pressures will prevent headline interest rates in the economy from moving up in the short term atleast. We expect interest rates to remain steady in this fiscal.

What is your view on the stock market?

Indian economy has shown strong resilience amidst the global turbulence and is likely to show a robust growth of 6.5 to 7.0%. As a result, India and few of the other Asian economies are likely to be the destinations of choice for growth investors across the globe. Risk aversion has reduced and liquidity is now quite robust. India as a growth economy is likely to attract significant capital over the next 2 years through the FDI/FII route. After a massive rally in the previous quarter, the market which was looking for a reason to correct got the same in the form of a low key budget. Although there would be worries on the fiscal front, what comes across as comforting is that the revenue estimates presented in the budget are quite conservative. Deficient monsoon would be an important worry particularly for companies that are dependent on domestic consumer demand. However, in the context of the GDP growth itself, the maximum worst case impact is estimated to be about 1 percent. One can look at this correction as a technical correction in a structural bull market. It is expected that Sensex EPS is likely to grow to Rs 900 in FY10 and Rs 1050 in FY11 v/s Rs 830 in FY09. As this year progresses, we will continue to see systematic upgrades in EPS estimates as the outlook improves. Thus it is anticipated that Sensex may touch a level of 16800 in the next 6 to 9 months period at which the markets would trade at around 16 PE which has been the historic mean for the Indian stock markets.

What is your view on the rupee?

Post the budget the rupee had seen negative sentiment as there was a disappointment over the lack of anticipated measures that would have boosted FDI inflows, including the raising of FDI limits and divestment of state-owned financial institutions. The FDI flows are a key component of the balance of payments and have played an important role in offsetting portfolio outflows, as well as funding the current account deficit, which is now re-widening on rising commodity prices. Besides this, the higher fiscal deficit implies increased pricing of sovereign risk in the medium-term, while the larger than expected fiscal funding requirement implies greater risk to be priced in the short-term. Thus, we expect rupee to weaken gradually and move in the range of 48-51 in the current fiscal. Over the long term however Rupee will only strengthen against the dollar.

Which are the sectors you are bullish?

We are bullish on Infrastructure, Financial Services and commodity sectors. We think infrastructure will be one of the key beneficiaries of government's thrust on this sector and expect investments to accelerate in this sector. This will benefit a large no of companies associated with this sector - either directly or indirectly. In fact we believe infra is a long term sustainable story in Indian context. Technology can also do very well with signs of US recovery.

What is your view on the commodity markets?

Commodity markets will be driven primarily by expectations of a revival in demand from US and Europe and a continuation of growth in Asia including China and India. The current rally seen in past three months in some base metals like copper and oil was primarily driven by these expectations. However, the base demand continues to be low in US and Europe as economic recovery remains elusive. The only drivers for commodity demand has been Asia where China and India's growth rates have kept the outlook slightly positive. We believe that commodity prices could remain range bound for a quarter or so before showing an uptrend on the back of better economic growth forecast. Commodity markets will also be positively influenced to some extent by the excess liquidity that has got created in the world due to the large stimulus packages announced by various countries. The combination of revival in demand and liquidity should keep commodity prices higher over the next 12-18 months.

What is your view on the bond market?

The estimated gross market borrowing for the financial year 2009-10 is pegged at Rs4.51 trillion as against the market expectations of Rs4.00-4.10 trillion. The revised fiscal deficit for FY10 came as a shock to the markets. Higher fiscal deficit clearly spooked the bond and currency markets.
RBI has been actively and efficiently managing the borrowing programme since the start of the financial year and will continue to do so. Although both RBI and Finance Ministry have clearly ruled out the option of private placement of government bonds. Therefore we believe that RBI will continue to support the yields by buying back securities in the open market and simultaneously intervening in the secondary market.
We expect RBI to respond and ease rates by another 25 basis points in the impending policy to support the Governments objective of growth and support the large borrowing programme. Although this may the last round of monetary easing Abundant liquidity (Avg LAF reverse repo amount 1.25 trillion), lower inflation and overall macro economic environment will continue to support the yields. There are no immediate concern on sovereign ratings downgrade, as the proposed budget deficit of 6.8% of the gross domestic product is within the international rating agency expectations and already accounted for in the present rating of India (source: post budget statement by International rating agency S &P).

What is your advice to retail investors?

The two big emotions that play hard on Investment decisions are fear and greed. An extreme of either proves to be equally devastating. The fear of losing your money triggers panic selling at one hand, whereas the fear of missing out induces mindless buying on the other. Hence, it becomes important for Individuals to have a balanced and more informed approach in the long term, an approach that is free of emotions.

Source: http://www.indiainfoline.com/news/showleader.asp?storyId=800&lmn=1